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An effective non-competition agreement can be vital in an industry like banking, which experiences extreme competition in the markets that the industry serves. In fact, competition within the industry has been a pertinent issue in recent years. Now is a better time than any to survey the legal trends, re-evaluate and revamp agreements, and develop a plan for handling potential violations.
Legal Trends
Whether on the federal or state level, promoting competition and creating more freedom of movement within the workforce has been a topic of debate in the banking industry and beyond since the outset of the COVID-19 pandemic and the start of the Biden Administration.
Federal Landscape
In the federal landscape, the Board of Governors of the Federal Reserve System (the “Board”) issued a decision in March 2021, giving insight on certain rights banks may have when their employees engage in improper behavior while moving to a competing bank. That case involved two former employees of a Wyoming state bank who worked on a potential deal to partner with and/or acquire a competing bank and then left the state bank to join the competing bank. As part of their exodus, the former employees improperly moved business, information, and documents with them, including loans they had managed with the previous employer, by circumventing the usual preliminary step of requiring a competitor bank to submit formal, written payoff information requests for those loans. The former employees also appropriated more than a dozen bank forms and documents, which they sent from their personal and bank email accounts without their previous employer’s authorization. They then took confidential financial, business, and customer information, such as lists of investors and potential customers. Not only was the previous employer successful in seeking damages for the employees’ actions, the Board eventually entered an order prohibiting the employees from further participation in banking under the Federal Deposit Insurance Act, 12 U.S.C. § 1818(e).
A few months later in July 2021, President Biden issued an “Executive Order on Promoting Competition in the American Economy.” The Executive Order included 72 initiatives designed “to increase competition and limit the power of corporations.” One of those initiatives encouraged the Federal Trade Commission to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” On September 20, 2022, FTC Chairwoman Lina Khan submitted a statement on behalf of the FTC discussing some of the FTC’s efforts in furtherance of this initiative as part of her testimony before the United States Senate Committee on the Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights. That statement described the FTC’s efforts “closely scrutinizing the growing use of non-compete clauses throughout the economy.” Case in point, the FTC issued an order in October 2021 against DaVita, Inc., a large provider of dialysis services, preventing the company from entering into agreements with physicians that would restrict their ability to work for a competitor. Khan’s statement went on to describe the FTC’s ongoing exploration of “the use of its rulemaking authority to limit non-compete clauses that restrict workers’ post-employment choices.” This statement and testimony come just a few days after the FTC’s announcement of its Policy Statement on Enforcement Related to Gig Work on September 15, 2022. The FTC warned in the Policy Statement that it will use the full weight of its authority to enforce laws, such as the Sherman Act (15 U.S.C. § 1), the FTC Act (15 U.S.C. § 45), the Franchise Rule (16 C.F.R. pt. 436), and the Business Opportunity Rule (16 C.F.R. pt. 437), to penalize gig companies that present non-negotiable, unconscionable contracts restricting mobility or competition.
While the Executive Order and the FTC’s actions have not made any immediate changes to the law on non-competition agreements, it has raised a lot of questions, especially for multi-state employers.
Arkansas Landscape
Arkansas has not been without its own happenings in the arena of promoting competition and creating more freedom of movement within the workforce. In the banking industry, litigation ensued at the end of December 2021 between two financial institutions involving employment agreements containing non-competition and non-solicitation provisions. One of the institutions alleged that the other improperly lured employees away and that those employees took customer and proprietary bank information when they left. The parties eventually came to a seven-figure settlement.
As hopefully all Arkansas employers know by now, non-competition agreements entered into on or after July 22, 2015, are valid and enforceable if “the employer has a protectable business interest” and the agreement “is limited with respect to time and scope in a manner that is not greater than necessary to defend the protectable business interest of the employer.” Ark. Code Ann. § 4-75-101(a). Unlike in the past, courts are now able to reform any unreasonable restrictions and enforce the reformed agreement. The court’s ability to reform an unreasonable restriction was demonstrated most recently in an order out of the United States District Court for the Eastern District of Arkansas in May 2022. In that order, the court reformed an agreement by eliminating certain language prohibiting salesmen from soliciting prospective customers while leaving in place a prohibition against solicitation of current customers.
State Landscape (Outside of Arkansas)
Trending in the same direction as the Biden Administration and FTC, several states (and Washington D.C.) have recently instituted or plan to institute some sort of ban on non-competition agreements. Illinois, Maine, Maryland, Massachusetts, New Hampshire, Virginia, and Washington currently prohibit non-competition restraints on low-wage workers. The definition of low-wage work between these states ranges anywhere from 200% of the federal minimum wage ($14.50/hour) up to $100,000 a year. These restrictions come in addition to the ones in Oklahoma, California, and North Dakota. These states generally prohibit non-competition agreements in the employment context altogether.
Rhode Island specifically prohibits non-competition restraints on non-exempt employees under the FLSA, while D.C. has amended its original act and starting October 1, 2022, allows employers to only enter into non-competition agreements with their “highly compensated” employees (those who make over $150,000 annually). Such agreements are still subject to certain conditions, including a maximum one-year time restraint, detailed descriptions of exactly what roles, industries, or competing entities the individual cannot work in or for and the extent of the geographic scope, and a 14-day notice period for presenting the agreement. D.C.’s law does not apply to employees who do not either spend or are anticipated to spend more than half of their working time in D.C. or regularly spend a “substantial amount” of work time in D.C. (if their employment is based in D.C.).
Reevaluating/Revamping Your Agreements
Even with Arkansas being a friendlier jurisdiction for non-competition agreements and allowing courts to reform agreements that may overreach, the discussion above highlights the need for a reasonable non-competition agreement, especially for employers with employees in multiple states. A reasonable agreement can help avoid litigation and the costs that come with it as well. The three areas of focus in drafting a non-competition agreement are (1) the legitimate business interests to be protected, (2) the time required to protect those interests, and (3) the geographic area where those interests should be protected.
Legitimate Business Interest
The business interest being protected has to be legitimate or there is no valid agreement. Ultimately, courts examine whether the protected information can be used to gain an unfair competitive advantage. The information being protected has to be truly treated as proprietary or confidential. That may be accomplished through a confidentiality agreement or workplace policies on confidentiality, proper data storage practices, immediate termination of administrative access and collection of work-issued devices upon separation of employment, as well as having necessary information security systems in place (e.g., secure logins with multifactor authentication and password-protected servers). Access to the protected information should be limited on a need-to-know basis. And the employees who fall under the need-to-know basis are those who most likely need to enter into an agreement.
Time Restriction
Two years is normally considered to be reasonable, but business context matters. In other words, what is the lifespan of the information (e.g., pricing, customer/client relationships, trade secrets, etc.) being protected? For instance, the time needed to protect customer/client relationships should include the considerations of how long it takes (a) to replace the former employee, (b) train a new employee, and (c) for the new employee to develop relationships with the customers/clients. And if a company’s pricing information or trade secrets change or update regularly, a longer time restriction will likely be unreasonable. Given the typical length of litigation, a tolling provision pausing the time restriction upon a violation may be worth considering to avoid the expiration of the time restriction before action can be taken in response to a violation.
Geographic Restriction
The target area is where the former employee’s work spanned. Courts typically will not enforce restrictions prohibiting former employees from working in areas or states they have never worked. In some circumstances, when an agreement is otherwise reasonably limited with respect to time and scope, a geographic restriction is not needed. For example, restricting a former employee from soliciting customers/clients which he or she has worked with during the past two years, for a one-year period upon separation of employment, would likely be reasonable.
Developing a Plan
The correct response to a potential violation is essential. This typically means immediately sending a demand letter detailing the portions of the agreement being violated and including a deadline in which to cease and desist any prohibited actions. If the demand letter is unsuccessful, litigation is likely the next step. Litigation provides critical injunctive relief in the form of a court order prohibiting the former employee from violating the agreement in place. Damaged customer/client relationships and goodwill lost from a business’s name are not easily repaired with money damages and may cause irreparable harm. Prompt action is crucial when it comes to litigation because not asking for injunctive relief before the expiration of the time restriction in the agreement could eliminate a meaningful remedy.
Conclusion
Enlighten, reevaluate/revamp, and plan. Doing so helps businesses prepare for the worst.